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Genentech proves the skeptics wrong
Biotech firm reaps rewards by trusting scientific instincts
Bernadette Tansey, Chronicle Staff Writer
Sunday, December 21, 2003
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Shrugging off a long season of thwarted plays, lowered rankings and second-guessing from the sidelines, major league biotechnology veteran Genentech Inc. is on the verge of setting a career record.

The South San Francisco firm that founded the biotechnology industry in 1976 is widely expected to score three new drug approvals within a one-year period -- an achievement that's rare for a biotech firm and impressive even among huge pharmaceutical companies.

Genentech has already released two new drugs, modeled on human antibodies, that block immune system malfunctions that can cause severe illnesses. The asthma drug Xolair, approved by the Food and Drug Administration in June, provides a new option for patients whose serious breathing problems can't be controlled with commonly used inhalers. Four months later, the FDA approved Raptiva, which attacks the root causes behind psoriasis, a painful buildup of reddened, scaly patches on the skin.

If the FDA also gives Genentech the nod soon for another therapeutic antibody, Avastin, it would be a first-in-class cancer drug that could extend the lives of colon cancer patients. What's more, Genentech's successful clinical trial with Avastin proved the value of a much-touted tactic that many other firms had tried and failed.

Only last year, Genentech seemed mired in setbacks, just as an overall market slide was lopping value off biotechnology share prices.

Even though Genentech had emerged as the top U.S. seller of tumor- fighting drugs with a pair of cancer drugs approved in the late 1990s, such established successes are often treated like yesterday's news by biotech investors. Purchasers of relatively high-priced, risky biotech shares are always looking toward future products in a company's pipeline that will keep earnings growth on a steep upward curve.

Genentech had set itself the challenging goal of sustaining an average annual earnings growth of 25 percent for five years through 2005, braced by its belief in the experimental drugs it had under development.

But in 2001, the asthma drug Xolair ran into delays at the FDA, followed by regulatory hitches for the psoriasis remedy Raptiva in 2002.

Then in June 2002, a Los Angeles jury decided Genentech should pay $500 million to a former research partner in an intellectual property dispute.

To top that off, the cancer drug Avastin, which was being tested in a range of tumor types, failed to deliver any benefit to breast cancer patients in clinical trials, the results of which were released in September 2002. Analysts concluded that Avastin was unlikely to work in any cancer indication and discounted it as a contributor to Genentech's future earnings growth. Genentech shares, which had been inching up from a summer low of $25, slumped back 10 percent.


Now, both Xolair and Raptiva have been approved, and Avastin is on a fast track for an FDA decision by March on whether it can be marketed to treat colon cancer. Genentech shares are trading in the low-$90s -- up 177 percent this year. To outsiders, the pioneering biotech firm's resurgence can seem like a startling reversal of fortune. But from the viewpoint of Arthur Levinson, Genentech's scholarly chief executive officer, the skeptics who doubted the firm could pull off these feats arouse mild puzzlement. For Levinson, Genentech is reaping the expected rewards of a confident commitment to long-term projects like Avastin, in spite of pressure from analysts to abandon it.

The skepticism about Avastin hinged on the tough scientific leap that had faced every other firm that tried to take on cancer using the same strategy.

Avastin is one of a long line of experimental compounds designed to stop cancer growth by preventing new blood vessels from sprouting around tumors to feed them nutrients -- a process called tumor angiogenesis. That tantalizing theory had once been hailed as a doorway to near-term cures. A host of companies spent millions on experimental anti-angiogenesis drugs.

But more than three decades of work had yielded little more than dashed hopes. Drugs that inhibited tumor blood-vessel growth in early studies failed to arrest the progress of the disease in full-scale human trials. Avastin's failure in the breast cancer study seemed to reinforce that gloomy lesson.

But Levinson steadfastly defended Genentech's costly commitment to Avastin studies. The company had hoped for a benefit in breast cancer but had seen stronger promise in early studies of the drug in colon cancer.

In June, Genentech stunned a packed scientific meeting in Chicago with data that established Avastin as the first compound to capitalize on the long- promising anti-angiogenesis idea. Avastin prolonged the lives of patients whose colon cancer had already spread to other parts of the body.

"People were standing there agape,'' said Dr. Larry Norton, a research leader at Memorial Sloan-Kettering Cancer Center in New York. Analysts now estimate that Avastin could grow into a blockbuster like Rituxan, bringing in sales of $1 billion or more per year. Genentech is continuing tests of Avastin in other cancer types.

Levinson, a puckish 53-year-old with interests ranging from photography to game theory, said tough scientific challenges are welcome at Genentech because they offer a better chance to leave the competition behind.

"The harder things are, in an odd way, the better I feel about the project,'' Levinson said. "If it's complicated, I have enough confidence in our scientists to believe we'll be able to understand it better than anyone else.''

Revolutionary origins

Genentech's rise from wild-eyed startup to industry powerhouse is the stuff of biotech legend. In 1976, Bob Swanson was a young venture capitalist who saw the commercial possibilities in a groundbreaking technique of molecular biology -- splicing genes from one creature, like a human being, into the simple genome of bacteria.

While the world reeled at the implications of modifying life and scientists marveled over the new research tool's power, Swanson was thinking about drug manufacturing.

Why not harness fast-growing bacteria to produce human proteins that are missing or defective in ailing people? At the time, such molecules would have had to be chemically synthesized or extracted from animals or plants.

Despite significant skepticism, Swanson not only lined up seed capital for the venture, but also recruited as a co-founder one of the pioneers of gene splicing, UCSF scientist Herb Boyer.

With that coup, Swanson also invented a revolutionary business model that is now routine in biotechnology -- the small startup founded by academic scientists. In the past, drug development was generally the realm of big pharmaceutical firms.

At Genentech, Swanson and Boyer continued to recruit academic stars like Levinson, who did his postdoctoral work with Harold Varmus and Michael Bishop at UCSF before joining Genentech in 1980. Bishop, now UCSF's chancellor, and Varmus won a Nobel Prize in 1989 for their work on cancer genes.

Genentech has single-handedly written a good share of the history of biotechnology: In 1977, the company and its collaborators at City of Hope National Medical Center were the first scientific team to figure out how to make genetically modified bacteria that could synthesize a human protein.

They started by inserting the gene for a small human protein, somatostatin, into the bacterial genome. Somatostatin had no commercial value for the company, but its production in bacteria proved their recombinant DNA techniques would work.

By 1979, Genentech and its research partners had also coaxed the bacteria to produce insulin and human growth hormone. In 1982, Genentech's recombinant insulin, manufactured and marketed by licensee Eli Lilly & Co., became the first biotech drug sold.

In 1985, Genentech won FDA approval to market its recombinant human growth hormone, Protropin, for children whose height would otherwise be limited by metabolic deficiencies. It was the first biotech drug both manufactured and marketed by a biotech company. Genentech turned a profit by 1979. In 1980, it claimed the honor of being the first biotech company to go public.

In 1997, Genentech's drug for non-Hodgkin's lymphoma, Rituxan, became the first therapeutic antibody approved to treat cancer. The following year, the breast cancer drug Herceptin was the first cancer remedy approved for patients with a specific damaged gene.

"It was like being a kid in a candy factory,'' said Dennis Henner, who worked at Genentech for 20 years, retiring as head of research in 2001. "Everything you wanted to do, you had world-class scientists to work with.''

Rough weather

Henner also weathered some of the rocky periods. In 1990, Genentech was facing a financial strain while trying to prove that one of its key products, the heart drug Activase, was superior to a cheaper drug called streptokinase. Genentech survived with a cash infusion from the Swiss pharmaceutical giant Roche, which paid Genentech $2 billion to acquire 60 percent of the company.

Henner said his hardest time at Genentech came in 1994 when the government started investigating Genentech's marketing practices for Protropin, the human growth hormone, for the previous nine years.

At the time, the drug was approved at the time only for children whose growth was hindered by growth hormone deficiencies. The company was accused of trying to drum up prescriptions for children who were short but perfectly healthy. The firm agreed to pay a $50 million fine to settle the case in 1999, pleading guilty to a single criminal violation related to marketing a drug for a use not approved by the FDA.

"What the company learned is that when times are bad, you keep in mind that you're not as bad as people think you are,'' said Henner, now a general partner at MPM Bioventures. "When things are up and it seems like the sky's the limit, it's good to be a little humble.''

Also in 1999, Genentech agreed to pay UCSF $200 million to settle an intellectual property dispute arising from the firm's earliest days. The university had accused Genentech of copying a gene for human growth hormone discovered in 1978 by UCSF, and then failing to pay royalties on UCSF's patent when it marketed its recombinant version of the hormone.

In another long dispute dating back to the 1970s, Genentech's early collaborator, City of Hope, accused the company of failing to share royalties on licenses it sold to the recombinant techniques they jointly developed to harness bacteria to make human proteins. In June 2002, a Los Angeles jury decided Genentech should pay City of Hope $500 million. Genentech is appealing the verdict.

UCSF officials say their current relationship with Genentech is excellent. The firm now has a reputation as the partner of choice for smaller biotech firms trying to bring experimental drugs to market, often giving them a better deal than they could get from a big pharmaceutical company.

But Levinson, who became the firm's CEO in 1995, said he wants to guard against an undercurrent that has clouded Genentech's image in the past.

"I've been here during periods, like the mid-1980s, when we started to get arrogant and believe we were smarter and better than everybody. I didn't like that,'' Levinson said. "We're enjoying our recent success, but if we let that go to our heads, we'll get eaten alive.''

Roche relationship

Levinson remained at the helm when Roche, the firm's major shareholder, acquired Genentech's remaining shares in 1999. In a quick maneuver admired by analysts, Roche then resold 40 percent of Genentech in a second public offering, recovering its original investment, but retaining the non-U.S. marketing rights to Genentech's drugs. Roche's current 58 percent stake, about the same portion it once bought for $2 billion, is now worth about $24 billion. Franz Humer, chief executive officer of Roche, said the two firms have enjoyed a fruitful cross-fertilization.

Roche gained a partner that could consistently translate theoretical knowledge into commercial products, Humer said. Roche had fostered basic research on monoclonal antibodies at its Basel Institute for Immunology, work that won a 1984 Nobel Prize for two scientists, Niels Kaj Jerne and Georges Köhler.

"But we never brought those elements to commercial fruition,'' said Humer. Genentech, on the other hand, has used its antibody expertise to develop its most successful drugs, he said. Genentech's anti-cancer antibodies, the lymphoma drug Rituxan and the breast cancer drug Herceptin, now bring in about 70 percent of Genentech's revenues.

Neither age nor growth has slowed Genentech's innovative drive, said Humer. "Genentech today is a company with close to 5,000 employees, and they've still got the culture of a young, imaginative biotech startup,'' he said. "Most companies stifle in bureaucracy at that size.''

Industry leader

Carl Feldbaum, president of the Biotechnology Industry Organization, said Genentech has helped pull the entire sector out of the financial drought of 2001-2002.

"In the last nine months, we've seen eight or nine new products for very important (disease) conditions,'' Feldbaum said. "For three of them to be Genentech drugs is a very powerful statement.''

Big drug companies have scored triple approvals in the past, but it's not a routine achievement, said Jeff Truitt, a spokesman for the Pharmaceutical Research and Manufacturers Association. "It's very impressive,'' he said.

Genentech's revenue is now on track to reach $3 billion in 2003. And in spite of the firm's high stock price relative to earnings, some analysts predict shares can still go up, possibly breaking past $100 within a year. That high stock price could be fragile if the company suffers setbacks, however.

"If something goes wrong, definitely it's vulnerable,'' said Banc of America Securities analyst Michael King. He estimates that Avastin could earn $145 million in 2004, but any hitch in manufacturing the protein could eat into sales. The 2002 regulatory delay for Raptiva related to FDA concerns over possible differences between the drug manufactured by Genentech's partner Xoma and the larger-scale batches later produced by Genentech. But King doesn't expect problems for Avastin.

"One thing that Genentech is superb at is the manufacture of proteins,'' said King.

Levinson, however, said the firm has to make a tricky calculation. How much should it scale up its antibody manufacturing capacity to match growing product demand without leaving an expensive new plant idle? "We will not get this perfectly right,'' he said. Last week, Genentech announced an agreement with the Swiss firm Lonza Group Ltd. for the manufacture of Rituxan at Lonza's New Hampshire plant.

King said the company faces other challenges in the marketing of its two new products, the asthma drug Xolair and the psoriasis remedy Raptiva. Xolair's high cost relative to other available medicines may limit its market, he said. But the drug will find its niche because it can help severely afflicted patients avoid a hospital stay, King said. Raptiva faces competition from three other novel psoriasis drugs that are good bets to grab market share. King doesn't own Genentech shares and his firm does no banking business for the company.

Genentech's varied inventory of over a dozen approved drugs, plus its stable of experimental compounds, helps its share price weather the ups and downs for each product, said John McCamant, editor of the Medical Technology Stock Letter based in Berkeley.

"To get that kind of diversity elsewhere, you'd usually have to invest in an array of different companies,'' McCamant said.

Larry Norton, the Memorial Sloan-Kettering researcher, said successful biotech companies like Genentech share a trait: They don't shift with the winds of scientific opinion.

Norton said the same pessimistic mood that once surrounded Avastin had also prevailed while Genentech persisted with work on antibodies like Rituxan in the late 1990s. Many researchers felt that antibodies, which are large, delicately folded proteins that must usually be injected, would be too hard to administer. Some experts thought they would not reach deeply enough into the mechanisms of cancer to make a difference, Norton said. But Genentech didn't swerve.

"They had a vision, and they pursued it successfully, and they didn't let automatic nay-saying get in the way,'' Norton said.

Genentech Chief Medical Officer Susan Hellmann said the company hopes to rewrite the medical textbooks on cancer by developing ever-safer and more effective combinations of biotech drugs.

Under Levinson's leadership, she said, Genentech can be "the kind of company that isn't afraid to be wrong.''

"Because when you're right," Hellmann said, "it feels so good.''

Genentech's drugs

Genentech, pioneer of the first biotechnology drugs, has a varied inventory of approved products and experimental drugs in development.


Protropin -- human growth hormone produced by genetic engineering; approved for children who fail to grow normally due to insufficient production of natural hormone. The first biotech product manufactured and marketed by a biotech company.


Activase -- recombinant drug that stimulates a natural substance, plasminogen, that prevents blood clot formation. This tissue plasminogen activator is approved for acute myocardial infarction, acute ischemic stroke and acute massive pulmonary embolism (or simply, for certain heart or lung disease and stroke patients).


Nutropin -- human growth hormone product approved for children and adults whose growth is inhibited by hormone deficiencies, kidney malfunctions and other disorders. Three variations of Nutropin with different delivery methods were approved between 1995 and 2002.


Pulmozyme -- a recombinant enzyme approved to boost lung function in cystic fibrosis patients.


Rituxan -- a genetically engineered antibody approved for certain patients with non-Hodgkin's lymphoma. The first therapeutic antibody approved to treat cancer.


Herceptin -- a genetically engineered antibody approved for certain breast cancer patients. The first humanized antibody approved to treat women with a specific genetic defect.


TNKase -- a variant of the tissue plasminogen activator Activase, approved for the treatment of acute myocardial infarction.


Cathflo Activase -- a preparation of Activase used to dissolve blood clots in catheters inserted into patients' blood vessels.


Xolair -- an antibody approved for patients with moderate-to-severe asthma linked to allergies.

Raptiva -- an antibody approved for patients with moderate-to-severe psoriasis.

Experimental drugs

Avastin -- a recombinant antibody designed to prevent tumors from developing a supply of blood vessels that would help them grow. FDA approval pending.

Lucentis -- an antibody similar to Avastin that is being tested in patients with the eye disease macular degeneration. Lucentis is designed to block blood vessel growth beneath the retina as well as blood vessel leakiness, both of which worsen the eye disease.

Tarceva -- a small-molecule experimental drug designed to interfere with cellular signals that cause tumor growth. Tarceva is being tested in a range of cancer types.

Omnitarg -- an antibody that attacks cellular signals linked to tumor growth, Omnitarg is being tested in multiple cancer types.

Genentech is also pursuing expanded approvals for marketed products like Rituxan, studying other in-house experimental products and working with outside partners on numerous drug development projects.

E-mail Bernadette Tansey at btansey@sfchronicle.com.

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